Discussion Paper

Banks and Nonbanks Are Not Separate, but Interwoven

Abstract: In our previous post, we documented the significant growth of nonbank financial institutions (NBFIs) over the past decade, but also argued for and showed evidence of NBFIs’ dependence on banks for funding and liquidity support. In this post, we explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities and being substituted by NBFIs. The enduring bank-NBFI nexus is best understood as an ever-evolving transformation of risks that were hitherto with banks but are now being repackaged between banks and NBFIs.

Keywords: non-bank financial intermediaries; nonbanks; shadow banking; bank regulation; macroprudential regulations; regulatory arbitrage; systemic risk;

JEL Classification: G01; G21; G23; G28;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2024-06-18

Number: 20240618